Thoughts on business, entrepreneurship, and life from a Silicon Valley entrepreneur and writer.

Monday, November 07, 2005

The World's Greatest Real Estate Investor Is Getting Out

The World's Greatest Real Estate Investor Is Getting OutWhat should the rest of us be doing?

"I feel totally safe playing polo on a field full of pros," says 58-year-old Tom Barrack. "But when amateurs are all over the field, someone can get killed. They have more guts than brains. They charge after every ball and don't know when to hold back." It's the same with the U.S. real estate market right now: "There's too much money chasing too few good deals, with too much debt and too few brains." The amateurs are going to get trampled, he explains, taking seasoned horsemen, who should get off the turf, down with them. Says Barrack: "That's why I'm getting out."

What's also very interesting is how Barrack made his money:

"If a potential deal is complicated or politically sensitive, so much the better. Barrack cherishes thorny situations because they scare off most other bidders. Auctions aren't for him. "How do you congratulate yourself when you've outbid eight of the smartest people in the world?" he marvels."

Or how about how his willingness to take risks paid off immediately:

"Over the next four years he bought package after package. It turned out even better than American Savings had. Owners who were eager to keep their properties bought back their debt for 70 cents or so on the dollar. Any loans Barrack couldn't unload he bundled together and sold on the public markets as mortgage-backed securities."

And how the bubble will end:

"The slump will show up first in speculative hot spots like Miami and Las Vegas, he says, where condo developers are preselling their projects for what look like big profits. When they actually build the units over the next year or two, he predicts, they will end up spending more than the units are now selling for. At that point, says Barrack, the developers will try to raise prices. "But most of these buyers are speculators," he says. "They will either sue the developers to get the original prices or get their deposits back and walk away." The developers will then put the units back on the market, and the glut of vacant condos will drive prices down. "It's the busted deals caused by construction costs that will cause a turn in the market," he predicts. "